Bank M&A Shows Some Signs of Life (Small Life)

The planned combination of two Michigan community lenders is among the latest in a string of small deals that have kept chugging along over the last year as such banks continue grappling with tepid loan demand, low interest rates, increased competition and mounting regulatory costs.

Mercantile Bank Corp., based in Grand Rapids, Mich., and Firstbank Corp., headquartered about 80 miles northeast in Alma, Mich. said Thursday they are merging in a $152 million transaction that will create the third-largest Michigan-based bank.

While some analysts have predicted a wave of consolidation would hit the banking industry, eye-catching transactions have been virtually non-existent as larger institutions continue to operate under the cloud of too-big-to-fail sentiment that has seemingly dampened the prospects for big bank deals.

But M&A has shown signs of life among small institutions, which often have a tougher time dealing with new regulatory requirements and intense competition because of their small balance sheets.

“There’s a realization that independence is very tough, and in the new world the regulatory environment is only going to get more difficult,” said Christopher McGratty, an analyst with Keefe, Bruyette & Woods.

Mercantile’s deal with Firstbank is one of 131 bank deals announced so far this year, according to data provider SNL Financial. Of those, only five are valued at more than $400 million. SNL’s data also includes deals for which financial terms have not been disclosed.

Some of the bigger transactions announced this year include PacWest Bancorp’s deal to buy CapitalSource Inc. for $2.3 billion; MB Financial Inc.’s deal to buy Taylor Capital Group Inc. for about $680 million; United Bankshares Inc.’s deal to acquire Virginia Commerce Bancorp Inc. for $495 million; and Union First Market Bankshares Corp.’s $445 million deal for StellarOne Corp.

Deals have proven to be popular with investors, Mr. McGratty said, noting the shares of both the buyer and seller have risen after recent announcements, a shift from previous cycles when typically only the seller saw an immediate boost and the buyer “took it on the chin.” Mercantile’s shares were up 5.1% at $19.73 in recent trading Thursday, while Firstbank’s shares were up 7.7% at $17.95.

The new merged bank will have $2.8 billion in assets, $2.3 billion in deposits and a $2 billion loan portfolio. The deal will help Mercantile increase its base of core retail deposits—an important source of loan funding—and allow Firstbank to leverage Mercantile’s commercial-lending strengths, executives for both banks said Thursday.

KBW’s Mr. McGratty says deals can fill voids felt by smaller institutions, and give them better funding profiles that will help them deal with an expected eventual rise in short-term interest rates.

Mercantile, with seven branches, and Firstbank, with 46 branches, said they don’t plan to close branches because there isn’t any overlap in their existing locations. Michael Price, chief executive of Mercantile, noted in a call with analysts Thursday that by combining forces, the banks would be able to spread “regulatory costs over a larger asset base.”

The deal may also help them better compete in business lending, an area where banks have become more aggressive by offering looser terms and lower rates to win new business.

Daniel Cardenas, an analyst with Raymond James, said both banks have pulled through the recession in relatively good shape, and are benefiting from gradual improvements in western Michigan’s economy. That said, he expects “battle fatigue” amongst small and mid-size banks that emerged from the downturn to drive more M&A activity.